Getting Your Storks in a Row

Last week I read all the major research on the response of fertility to economic incentives. There are actually two distinct literatures. The first focuses on the effect of intentional "birth subsidies" on child-bearing. The second focuses on the unintentional effect of welfare (and welfare reform) on child-bearing.

Striking contrast: In the "birth subsidy" literature, researchers usually find fairly large effects in the expected direction. In the welfare literature, in contrast, most researchers find little or no evidence that welfare increases fertility - or that welfare reform reduces it.

The single best piece in both literatures put together: Kevin Milligan's "Subsidizing the Stork" (Review of Economics and Statistics 2006; ungated working paper here). Milligan begins by describing a remarkable social experiment, Quebec's Allowance for Newborn Children (ANC). From 1988-1997, Quebec wrote checks to all households with new babies. The payments gradually rose, plateaued from May 1992 through September 1997, and were then abolished. At the plateau, the birth subsidy was: C$500 for the first child, two payments of C$500 for the second child, and twenty payments of C$400 for each additional child.

This program gives Milligan three distinct kinds of variation with which to estimate the effect of incentives on fertility. He can compare:

1. Quebec to the rest of Canada2. Fertility in Quebec over time (since the birth subsidy repeatedly changed)3. Fertility of families with zero, one, or more children

These comparisons allow Milligan to answer almost all complaints about the validity of his "natural experiment" assumption:

[E]ven if there were some change in unobservable determinants of fertility in Quebec contemporaneous with the introduction of the ANC, the triple-difference comparison of first births to higher order births would permit inferences about the effects of the policy. In other words, a social trend would have to have a differential impact on families of different sizes in order to hinder inferences.

Putting all this info together, he finds: "the responsiveness of fertility to a birth subsidy is estimated to be large--up to a 25% increase in fertility for families eligible for the full amount. A C$1,000 increase in first-year benefits is estimated to increase the probability of having a child by 16.9%."

My favorite part of Milligan's piece, though, is how he reconciles the birth subsidy and the welfare literatures. To do so, he looks at the fertility response of young and/or unmarried women - the same populations that the welfare literature studies. He finds that the fertility of this sub-sample is unusually unresponsive to incentives:

[W]omen who are single and women who are younger may be less responsive to the ANC than other women. These types of systematic differences between women likely to collect AFDC and all women may explain the different results found in AFDC studies and the ANC results presented above.

At first, this seems counter-intuitive. But it is consistent with another surprising fact: Never-married moms in their thirties are about twice as likely to have one kid rather than two, while married moms are about twice as likely to have two kids rather than one.

What's the connection? Well, both findings suggest that, as a rule, young unmarried women get pregnant by mistake. They're far from affirmatively wanting a baby, so modest financial incentives don't change their plans. Older, married women, in contrast, are already "in the baby business." They're close enough to wanting another child that a little financial encouragement is often all it takes to tip them over the edge. Does that make sense?

I think it also helps that very few couples know precisely how many kids they want, either because both husband and wife are uncertain ("we want 2-3 kids") or because the slightly disagree (wife wants 3, husband 2). So at the margin, the payment moves them to the higher end of the desired range.

The C$8K is not in 2009 dollars. Updating for inflation between 1989 and 2009, the 8K is worth $12,137.57 today. So, a bit bigger.

Second, the big boost on 3rd parity fertility is there in the raw data and still there after doing some fancier econometrics. It is pretty robust. Furthermore, when the policy was canceled in 1997, there is a big drop off in 3rd order fertility of comparable magnitude. (That's not in the paper, but can be seen in the raw data--I had a student who studied the cancellation of the program and wrote that paper--not published though.) So, while it might seem big, the data spoke and that's what I found.

A huge question that needs to be researched further is the effect of home prices on marriage and fertility rates by education level. Mike Judge has argued, in the opening scene of "Idiocracy," that high IQ people are much more sensitive to the home price market than are low IQ people.

There's a fair amount of data to support that. Perhaps Dr. Milligan could look into it.

As a father of four (and perhaps more eventually) with a working interest in economics, I've been really enjoying reading your posts on these topics -- they make for interesting dinner conversation with the wife.

Knowing a lot of other large families, I can see how a third and later child subsidy equivalent to 15-20k pre tax would make a big difference for a number of people. There are a statistically small number of families which aspire to have a large number of children, and for those families additional children beyond two tend to come pretty steadily. The reasons why people stop or space wider are generally:

1) Hitting a number of children which suddenly seems like a lot more work.

2) Financial obstacles.

A subsidy would do nothing about the former, but it obviously could do a great deal to mitigate the latter.

For couples who don't see themselves as "wanting a large family" I would imagine that it's more marginal, as they'd be trying to decide whether three would be too much work regardless of the amount of money potentially available. However, if that hesitation about the amount of work was more marginal (even for just one spouse) I could see the large amount of money available ruling out a lot of other potential obstacles.

An interesting piece of survey data would be whether subsidies of this sort actually inspired a greater desire to have children or simply increased immediate conversion of couples who want to have another child "someday" to couples who go ahead and get pregnant.

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